Money Myth: Bankuptcy Wipes Out All Debt

Carmen Wong Ulrich discusses what kind of debt cannot be wiped out in bankruptcy.

Money Myth: All debts are wiped out in bankruptcy.

Not so, says our resident credit guru John Ulzheimer. There are two types of bankruptcy that consumers can file for: chapter 7, which dissolves all “statutorily dischargeable” debt, and chapter 13, which is known as a “wage earner plan” and requires the consumer to pay into a trust money that is distributed among their creditors.

Chapter 7, which is the “be all and end all” of bankruptcies, still doesn’t wipe out all debt. Tax liens cannot be discharged – Uncle Sam will still have to be paid – and neither can student loans, which are known as “debtors’ prisons” for a reason. Additionally, and for good reason, family and child support obligations cannot be discharged in either chapter 7 or chapter 13 bankruptcies.